Tax Tips
| Publication year | 1980 |
| Pages | 80 |
1980, January, Pg. 80. Tax Tips
Even for experienced tax practitioners, the investment tax credit provisions of the Internal Revenue Code (IRC) are sometimes the source of unpleasant surprises. This is particularly the case with regard to the investment tax credit for "used property." In addition to the many requirements regarding the investment tax credit for qualifying property ("§ 38 property"), several additional conditions must be met with respect to used property before a credit is available. First, it must not be used subsequent to its acquisition by the same or a related person who used such property prior to such acquisition. Second, the property must be acquired by "purchase." In addition to these two requirements, there are special limitations with respect to the cost of used property which must be taken into account.
As set forth in § 48(c)(1),(fn1) used property will not qualify for an investment tax credit if,
This clause actually contains two related rules First, the property cannot be used by the same person before and after its acquisition (the "same user rule"). Second, the property cannot be used after its acquisition by a person who bears a certain specified relationship to the user before such acquisition (the "related user rule"). This second rule incorporates the attribution rules found in four sections of the IRC.(fn2)after its acquisition by the taxpayer, it is used by a person who used the property before such acquisition (or by a person who bears a relationship described in section 179(d)(2)(A) or (B) to a person who used such property before such acquisition).
Turning first to the same user rule, there are three main situations in which it will operate to deny an otherwise available investment tax credit with respect to used property.
Sale and Leaseback: First, is the sale and leaseback transaction. In this situation, if the owner of an item of property sells it to a purchaser, and the purchaser then leases it back to the prior owner, the purchaser will not be entitled to an investment credit because the same person has continued to use the property.(fn3)
Purchase by Lessee: The second common situation in which a denial of the credit occurs is where a lessee purchases property which was previously being leased. This commonly occurs where the lessee has an option to purchase property. Furthermore, if the lessee purchases the property within seven years after it was acquired by the lessor, the lessor may be required to recapture all or a portion of the amount of the credit. This results in a loss of the credit to both lessor and lessee.(fn4)
In Gilbert Roger Haddock,(fn5) the lessee-taxpayer leased new § 38 property and the lessor did not elect to pass the investment tax credit through to the lessee pursuant to § 48(d). Subsequently, the lessee purchased the items of property. In denying the lessee an investment tax credit, the Tax Court noted that the property could not be considered new § 38 property since the lessor was the owner at the time the original use of the property commenced.(fn6) Furthermore, the property did not meet the definition of used § 38 property because the physical use of the property was by the same person before and after the purchase and sale.
Sale Subject to Lease: The third situation in which a credit is not available for used property is where a particular item of property is sold subject to a preexisting lease. Obviously, the user before and the user after the transaction is the same person.
Turning to the related user rule, § 48(c)(1) denies a credit for used § 38 property if the property is used before and after a transaction of purchase by "related parties." The...
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